Bancorp Inc (TBBK) 2006 Q3 法說會逐字稿

Good day ladies and gentlemen, and welcome to the Q3 2006 The Bancorp, Incorporated Earnings Conference Call.

[OPERATOR INSTRUCTIONS]

I would now like to turn the presentation over to Miss. Betsy Cohen, CEO of Bancorp, Incorporated. Please proceed ma'am.

Thank you Litasha, and I'm going to ask Andres Viroslav, the Director of Communications to read the Safe Harbor Statement.

Thank you Betsy, good morning. When used in this conference call, the words believes, anticipates, expects and similar expressions are intended to identify forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are subject to risks and uncertainties, which could cause actual results to differ materially from those anticipated or suggested by such statements. For further discussion of these risks and uncertainties, see the Bancorp, Inc.'s filings with the SEC. Listeners are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. The Bancorp, Inc. undertakes no obligation to publicly release the results of any revisions to forward-looking statements, which may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. Betsy?

Thank you, Andres. It was a brilliant reading, and I'm delighted to welcome you to The Bancorp Third Quarter Earnings Call. During this quarter, we experienced growth in a number of areas. First, diluted earnings per share for the three months ending September 30, 2006, increased by almost 92% over the comparable period for 2005. Total loans were just -- increased by 55%, just a bit shy of the 60%, which you know that we have been focused on as a loan increase.

And, I think among the best news really is the efficiency ratio, which has been declining about 2% a quarter, 1.5% a quarter. It varies. But, we continue to support the organizational growth with modest increases in G&A because of the scalable business model. Not only because we're cheap, but because of the scalable business model that I think that we have developed.

One way to test that in terms of the sustainability is to take a look at the three months non-interest expense number for 2006 as compared to the three months for 2005, and you'll see although there is growth, roughly 10% growth, that there is not significant growth in terms of the growth of the institution. So, we focus on controlling our expenses, but doing it in a way, which we hope is effective.

I'd like to draw your attention now to two other numbers that are under the condensed balance sheet, average condensed balance sheet, excuse me. And the first is loans, which have an average of just under $900 million for the third quarter with loans ending at period end at 947 and total deposits, which have an average of 908 against a period end of 1.021 billion. And in some ways, that describes the dynamics or highlights the dynamics, which resulted in a downtick in our net interest margin, loans being funded at the beginning of the quarter and deposits coming in toward the end of the quarter, and therefore the loans being funded with the highest cost of funds in the portfolio.

We see -- and that's a timing issue, which is quarter to quarter, but we think that with the increase of debt, we anticipate that both from seasonality and from growth in the fourth quarter in deposits that some of that will be -- some of the compression pressures will be mitigated as the result of the growth in deposits. And one sort of snapshot of that is the Health Savings accounts in which we see significant growth even through the first months of the quarter in terms of those deposits, which come in in the fourth and again in the first quarter of the year. So, there's some seasonality.

The other seasonality that is present that contributed to the compression is, in fact, the fleet automobile leasing, which is one of our business lines, which is as a percentage of the portfolio as a whole, lower than our 15% target. And in part, that's because not a lot of leasing gets done during the third quarter. It's a model year change period, and much more of that occurs in the fourth and, indeed, in the first quarter of the year. So, I think there were several contributors that are not only macroeconomic contributors, because we've seen compression across the banks but are specific to our institution in terms of seasonality, which contributed to that 20-point compression.

I still do think though that if one looks across the banks at a -- at the -- those that may or may not be competitors, we are still -- the interest margin is still significantly above those institutions. And if you wish, when you ask questions, I'll be glad to name them. We are -- also had a spike up in the non-performing assets or loans. And, I just wanted to give you some insights in -- or, insight into that situation as well, primarily made up of first mortgage loans.

And, our -- which rose the -- the delinquency arose as a result of death and other life events. We estimate that 90% of them will be resolved before the end of the year and off the balance sheet. And, we can tell you that 90% of them -- that 75% of the balance is under -- is subject to agreement of sale or pay out. And another 15%, we know is in resolution and believe that it will be resolved by the end of the year. So, we think it's a short-term spike, see no loss in -- well, that's not quite true. There's $7,000 in loss in that number and beyond that, do not have a pipeline, which reflect this kind of spike-up, we think again.

There were some questions because the condominium market in some of the larger cities was highlighted in the press over the last couple of months, I would guess, towards the end of the second quarter, at least since our call. And so some of you have asked about our exposure to condominiums or single-family houses or townhouses in Philadelphia. And, that number in total is roughly $19 million or $20 million in exposure. That doesn't take into account houses that are under agreement and that are being -- or apartments that are under agreement that are in the process of being delivered. So, that is that exposure.

I think others asked about the exposure to -- I'm trying to answer as many of your questions -- to the Jersey shore that were not primary homes, because as many of you know, there are some portions of the Jersey shore where they are building homes for people to live in all year round and moderate income housing. And, that's mostly related to the increase in work force at some of the casinos. For example, in Atlantic City, Borgata is in the process of adding 1,500 employees.

And so, that kind of thing goes on as well. But, we didn't think that that was your primary interest. And so without subtracting houses under -- or apartments under agreement but taking out the primary houses, we have exposure some place in the $60 million area. Many of those houses are in the process of being completed and were intended for 2007 spring sale. So, we'll give you more color on that, but we have no delinquencies in that area. We'll give you color on that as we get closer to that timeframe.

I think that that covers an analysis of the basic financial situation of the institution. I'm going to ask Frank just to talk about the statistics related to affinity banking that we generally share with you.

Very good, thank you Betsy. During the quarter, the bank closed six new relationships. One of those, the Healthcare Group that has 700,000 lives covered, three Private Client Groups, one payments group and one sort of other general group. In our Health Savings Group, our Health Savings accounts grew to just shy of 50,000 accounts total. We generated almost 3,800 accounts during the quarter. As Betsy had mentioned, the third quarter is typically a light quarter for this line of business, both from an account generation and funding standpoint, but we've already seen -- we've already realized a nice pickup in the fourth quarter and would expect to continue to see that play out through a very strong open enrollments period through the December, January, February timeline as we've seen in previous years.

Assets under management in our Private Client Group grew to $108.7 billion in total assets under management. The uptick there is both related to new clients signed and organic growth of our current partners, which have realized significant year-over-year growth of their portfolios. The Private Client Group was also a significant contributor this quarter to the net outstanding loans, which they contributed almost $30 million in growth to that category.

Our payments group volume, both on the card and ACH group was relatively flat Q2 to Q3, again, very seasonal business with an expected spike coming in the fourth quarter. Net interest income on the merchant side was up 10% quarter-to-quarter though, Q2 to Q3 in the merchant business. And, the merchant business also did grow deposits $20 million for that quarter, so we're getting back to our normal generation of deposits from that line of business.

One other item that I know it's been asked about in the past that we wanted to start to provide you also was statistics on the bank's Check 21 remote deposit program. During the quarter that we've had this launch, we actually processed over 13,000 deposits totaling almost $59 million in total on the platform and realized significant growth from coming out of our second quarter beta into our third quarter launch and continued to see significant growth prospects for the product moving forward.

Thank you, Frank. You might note that the Health Savings Accounts, the deposits at the end of the quarter were approximately three times what they were at the end of the third quarter 2005 and that we variously are rated between fifth and ninth, or fifth and eighth actually, in terms of largest aggregators of these accounts. And, that includes folks like United Healthcare that have, what is it called, Xante Bank, which is clearly just not a competitor since they have a captive market. But, we think that our investment in this line of business in terms of a source, a growing source of low-cost deposits has really begun to pay off.

I would now be pleased to invite questions. Litasha, if you would facilitate that please?

Sure. [OPERATOR INSTRUCTIONS] And, your first question comes from the line of James Abbott with FBR. Please proceed.

Hi, good morning everyone. I was wondering if you could give me sense, just backing up to the non-performing assets.

Sure.

What -- how many loans is the non-performing asset number? The increase was about $7 million. Can you tell us --?

Yes, I don't have that number right in front of me, how many loans it is James, but I'll be glad to get back to you with it.

But, it was more than one or two or three?

Yes.

Okay. Is it a large number?

Mostly first mortgage.

Mostly first mortgages, so the typical --?

We had people -- borrowers dying like flies.

Okay. That's -- I'm always the commentary off on that one, but --.

Thank you.

I guess it's not so good for future business growth then. No, I'm kidding. Is the typical first mortgage for The Bancorp in the $200,000 to $300,000 range?

Betsy Cohen. No, they're much more significant. Remember, these are primarily -- we don't -- we're not in the first mortgage business. And, these are primarily loans that are being made to customers of Private Client relationships so that they're coming to us from the asset manager. And so, we know that they have substantial assets, but sometimes you get caught in a divorce or a death or something of that sort where it just takes time to resolve who's paying what.

Okay. And I guess, could you tell us when the loans were originated approximately, about how seasoned were the loans particular time?

I'd have to take a guess on that, but I would say that these loans were over two years old, most of them.

Okay.

Betsy Cohen. I can't think of any right off the top of my head that were new.

Okay, so just bad coincidence?

Yes.

It all happened.

Yes, absolutely.

Okay. And one of the other questions that I had is on the Health Savings deposit volume, it's shifting gears obviously, but what would you expect over the course of the next couple of quarters as far as volume growth there? Do you -- can you give us a range there?

Are you talking accounts or deposits -- or dollars?

I'd be particularly interested in dollars.

Sure. I guess it's not too far -- we could tell you that the average account is still $1,100 to maybe $1,300, in that range depending upon the time of year. It's unclear what the usage is going to be because there's not enough history. But using that as a guide, and we had a very ambitious goal of 100,000 accounts by the end of this season. And probably the season is toward the time that we're talking to you again in January, and we don't think we'll be far off that, so someplace in the $85 million to $100 million range, I think is very realistic.

Okay, thank you very much. And that we see that fully embedded in the balance sheet by the -- for the average balance for the first quarter?

I'm sorry. James. You're not coming through.

Do we see that fully embedded in the balance sheet for the first quarter on the average balance basis?

No. Because, remember that -- and that's why I'm giving you such a broad range, because people fund their accounts on a monthly basis.

True, okay.

You wanted to add something, Frank? I'm sorry.

No. I was going to say, that's very true, James. The other thing that we've seen historically is the first quarter and second quarter are the heavy funding quarters. The fourth quarter and the first quarter are the heavy accounts opening quarters. So in essence what happens is over the course of the year, the average balance in these accounts slides down and then spikes back up in the first quarter and the second quarter as employers and individuals fund these accounts at a faster rate.

Okay.

We would expect to see that again in the next handful of quarters.

Okay.

If I could anticipate your next question, you might ask about, do we anticipate the increase in non-interest expense attached to these significant opening account -- numbers of accounts opening. And the answer, I think, is really not anything significant, because as you know, we have built an automated platform for the opening of these accounts with this kind of volume in mind. And although it doesn't pick up every account, it picks up enough to keep our expenses flat.

Okay. Thank you. Actually, I do have a question on expenses and --.

Sure.

Tax related to maybe -- I guess I was a little confused why the expenses didn't go up and you had such good balance sheet growth. Could you give us a sense, over the course of the next year or two years of the company's life, your expectation for every incremental $100 million of loan growth, what sort of percentage of expense growth, should we expect $1 million of expense growth?

I don't know that I can give you that answer at this moment, but I'll be glad if that's a metric that you're interested in to devise that. But remember, we periodically add loan officers or officer groups, which I think we told you in July we did in June. And, those officers, part of the reason that there's been an increase is what Frank was describing, which is the contribution by the Private Client Group. But, the other part was that we have a bigger team. And, it takes about a quarter for those loans to hit the balance sheet.

Okay. All right, thanks. And if there are further questions, I'll follow up at the end.

Okey doke.

Your next question comes from the line of [Kevin McKay] with [Squared Advisors]. Please proceed.

Hi. Can you tell me a little bit about the growth in the loan portfolio? Were those big loans, little loans, and were they local to the Philadelphia market or anywhere in your footprint?

Yes. $30 million of the roughly $105 million came from Private Client referrals, and they were primarily security backed loans that range generally from $0.5 million to $5 million, but supported by appropriate collateral. And having said that, I can tell you that that number is a little bit hard to predict at the end -- for the end of a quarter, because many of these are lines. We've had traditionally, about four -- not traditionally, but we have worked up to having about 40% usage. Is that about right, Frank? 40% usage on our outstanding, committed, securities backed lines.

So, it could be -- there is a little bit of seasonality in there in that they get drawn down for taxes. So, you might see a little bit more of a spike in the -- or percentage, spike in the percentage used in the second quarter or again in the fourth quarter when people are truing up their tax -- their estimated taxes.

The balance of the loans of -- I don't have the average size, but if that's something you're interested in, I'm happy to get that to you.

Okay. That would be great. And in the commercial mortgage, where was that primarily focused?

Oh, I'm sorry. You asked about the geography. The securities backed loans don't have a geography as such. But, the rest of the loans are within our geographic area.

Okay. And given the increase in sales this quarter, do you feel it's appropriate to increase the reserve ratio?

No, we don't at this time. But, we certainly always are looking at it.

Okay, thank you very much.

[OPERATOR INSTRUCTIONS] I show no further questions in the queue.

Well, we're grateful to those of you who asked questions, and I know that many of you have responded to us in some way since we issued the -- issued our earnings yesterday. It seems like a longer time ago than that. And so, we look forward to reporting to you again in January. Thank you very much.

This concludes the presentation. You may all now disconnect. Good day.